Third-party beneficiary matrix
Remedies & Third Parties · Apr 21
Floor. ~40 min: R2d § 302 + Lawrence. The doctrine the next class assumes you have covered.
Target. ~75 min: Floor + Sovereign Bank + R2d § 304 + synthesis.
(1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either
(a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or
(b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.
(2) An incidental beneficiary is a beneficiary who is not an intended beneficiary.
A promise in a contract creates a duty in the promisor to any intended beneficiary to perform the promise, and the intended beneficiary may enforce the duty.
(1) Discharge or modification of a duty to an intended beneficiary by conduct of the promisee or by a subsequent agreement between promisor and promisee is ineffective if a term of the promise creating the duty so provides.
(2) In the absence of such a term, the promisor and promisee retain power to discharge or modify the duty by subsequent agreement.
(3) Such a power terminates when the beneficiary, before he receives notification of the discharge or modification, materially changes his position in justifiable reliance on the promise or brings suit on it or manifests assent to it at the request of the promisor or promisee.
R2d § 302: a third party is an intended beneficiary (and can sue) only if recognizing her right is appropriate to effectuate the intent of the parties, and either —
The test runs on the contracting parties' intent, read objectively from the contract and its circumstances. It does not run on whether the third party was foreseeably affected.
20 N.Y. 268 (1859)
New York Court of Appeals
Rule. Where one party makes a promise to another for the benefit of a third person, that third person may enforce the promise even though he is not a party to the contract and gave no consideration for the promise. The third-party creditor beneficiary has a direct right of action against the promisor.
Both are intended beneficiaries who can sue. They differ in why the promisee wanted the third party benefited:
533 F.3d 162 (3d Cir. 2008)
United States Court of Appeals for the Third Circuit
Rule. A party benefiting incidentally from a contract designed to operate within a private regulatory system has no right to enforce the contract as an intended third-party beneficiary. Where the contract and the surrounding regulations channel enforcement through specified internal mechanisms, the third party is at most an incidental beneficiary.
An intended beneficiary's right is not absolute the instant the contract is signed. The promisor and promisee can modify or rescind the contract — and cut off the beneficiary — until her rights vest.
Under R2d § 311, the beneficiary's rights vest when she:
1. relies materially on the promise,
2. brings suit to enforce it, or
3. manifests assent to it at one party's request.
Before vesting, the deal is the contracting parties' to change. After vesting, the beneficiary has a locked-in right the original parties cannot bargain away without her consent.
A third-party beneficiary takes the right as it exists in the contract — no better than the promisee's own right. So the promisor can raise against the beneficiary essentially the same defenses it could raise against the promisee:
Facts. Landlord leases to Tenant; lease requires Tenant to procure property insurance naming both Landlord and Tenant as insureds. Tenant buys insurance from Travelers but never adds Landlord as a named insured. Fire destroys part of the building. Landlord files a claim with Travelers.
Question. Can Landlord enforce the insurance policy as a third-party beneficiary?
Analysis. R2d § 302: intended beneficiary requires intent of the parties to the contract — here, Tenant and Travelers. The Travelers policy does not name Landlord. Travelers had no notice of any intent to benefit Landlord.
Landlord's argument: Tenant clearly intended to name Landlord (lease required it). But Tenant's intent alone is not enough — intent must be shared by both contracting parties to the policy. Travelers' lack of notice is fatal.
Likely result. Landlord loses against Travelers. Landlord's remedy is against Tenant for breach of the lease's insurance covenant.
Drafting lesson. A lease requirement to procure insurance is not self-executing. Landlords should require Tenant to deliver a certificate of insurance showing Landlord as named insured, and renew annually.
Variation. A city contracts with a private waste hauler to "ensure all residential trash is collected weekly to maintain public health." A homeowner whose street is missed sues the hauler as a third-party beneficiary.
R2d § 313 + the "public-at-large" doctrine: when the government contracts for services that benefit the public, individual members of the public are generally incidental beneficiaries, not intended beneficiaries. Otherwise every government contract creates millions of plaintiffs.
Exception: when the contract specifies that individuals are intended to enforce, or when the failure is so direct that the individual's harm is the contract's whole point (rare).
Why? Administrability + separation of powers (enforcement of public contracts is for the government, not for individuals).
Facts. Subaru Distributors had an exclusive distribution agreement with Subaru of America (SOA). Fuji (the manufacturer) later began supplying near-identical vehicles to Saab for sale in the same territory. SDC sues as a third-party beneficiary of the Fuji-SOA agreement.
Question. Standing?
Answer. Turn on the Fuji-SOA contract language. If it expressly granted SDC exclusivity, SDC has standing as an intended beneficiary (creditor-beneficiary analogue — SOA owed exclusivity to SDC and Fuji's promise discharged it). If the contract is silent on SDC and only governs Fuji-SOA, SDC is incidental.
See Subaru Distributors Corp. v. Subaru of America, 425 F.3d 119 (2d Cir. 2005).
Rules. R2d § 302 (intended vs. incidental); § 304 (direct cause of action); § 311 (vesting and modification).
Cases. Lawrence v. Fox (creditor-beneficiary as classic case); Sovereign Bank v. BJ's (intended-beneficiary doctrine at the edge of modern commercial systems).
Punchline. Privity is the default; third-party beneficiary is the exception. The exception runs on intent of the contracting parties, not foreseeability of harm.
Open question. What if the third party is not a beneficiary at all but the original party transfers her rights to someone new? Next class: assignment and delegation.
Next class: Assignments & Delegations
_Remedies & Third Parties_ · Apr 22
Read R2d §§ 317, 318, 280 with McCloskey and Birdsall. If you transfer your right to collect $10,000 from me to your friend, can I object? What if you transfer your duty to PAY me $10,000 to your friend? The two questions look symmetric. They are not. Come ready to answer. You may be called.